Another day, another sign the economy is heading straight for that “no-landing” scenario I’ve been talking about for weeks now …
… and yet another sign the two dividends we’re going to discuss today are better buys than they’ve been in months.
(One of these staunch payers kicks out a rich 8% divvie. The other has grown its dividend a ridiculous 425% in the last five years. A buy back then would be kicking out a sweet 6.2% dividend today, thanks to that breakneck growth!)
Inside the Economy’s “Touch and Go” Landing
When you hear “no landing,” your first impression might be that it sounds like a good thing, right?
After all, it implies the economy will keep humming along, and that recession we’ve been worrying about since, well, 2020, will keep being pushed back.
All good. Except here’s the rub: Inflation comes back.
I mean, when you have a federal government spending nearly $2 trillion more than it’s taking in, it’s easy to see how this monetary inflation could seep into consumer price inflation.
And there’s no way an extra $2 trillion dropping into the system isn’t going to juice the economy! No matter who wins the election, I think we can all agree that this spending is unlikely to be tamed. The opposite, in fact—fueling inflation even more.
A quick look at the headlines brings more warnings of a potential resurgence of inflation: An expanding war in the Middle East, for example, has been pushing up oil prices. And even though the port workers’ strike has been settled, it reminds us how easily our supply chains can be disrupted.
And of course we had last week’s blowout jobs report, which showed continued strong wage growth.
Powell Sees the Inflationary Forces Lining Up Against Him—and Blinks
Jay Powell seems to see this inflationary wave rolling in. Last week, he tamped down expectations of more jumbo rate cuts, like the 50-pointer the Fed dropped last month.
Futures markets agree—they now point to just 75 basis points in cuts between now and the Fed’s last meeting of the year, on December 18.
So where does that leave us?
We’re looking to buy dividends that ride this growing economy while profiting from inflation’s return. That setup points straight to one sector: natural gas stocks.
There are two other reasons to buy “natty” stocks now, too.
First, there’s the massive stimulus plan China announced a little over a week ago. That’s likely to spur gas demand, as China is the biggest importer, according to the Energy Information Administration (EIA).
The other factor working in our favor is gas’s tendency to hit its $2 “price floor” and bounce—exactly what it’s doing now.
A price that’s bottomed and has momentum? That’s typically a great time to buy. So let’s dive into those two dividends I mentioned off the top, starting with our 8% payer.
“No-Landing” Pick No. 1: An 8% Divvie That Grows
At times like these, with energy prices still low but moving up, we look to the 8% dividend kicked out by the Alerian MLP ETF (AMLP
Alerian MLP ETF
These firms—master limited partnerships (MLPs), to be exact—collect tolls on the oil and gas that moves through their lines and sits in their storage tanks.
MLPs make money in all energy seasons, but it’s much better to own them when prices are at least steady or better yet rising, to snag price upside and sweet dividend payouts. When oil and gas prices (and shipping volumes) rise, the pipeline stocks AMLP owns boost their dividends. That’s resulted in a steady grind higher for the fund’s payout:
Best of all, AMLP’s rising payout pulls its price up—a phenomenon I call the “Dividend Magnet.” The pattern is unmistakable:
So where does that leave us? With an 8% “starter” yield that’s set to grow on a buy made today, as our “no-landing” setup pushes commodity demand (and prices) higher. Oh, and a share price poised to ride right along with it, too.
By the way, buying MLPs through AMLP also eliminates one of the headaches of buying MLPs “direct”: complicated tax reporting.
AMLP’s top holding, Plains All-American Pipeline LP (PAA), kicks you a fussy K-1 form at tax time, which is a hassle for you or the pro who files your taxes. (Trust me, I once got a firm talking-to from my accountant after buying MLPs a few years ago.)
But buy through AMLP and voila, no K-1! Just a normal 1099 showing your dividends received. Which, of course, dishes that elite 8%.
“No-Landing” Pick No. 2: EQT Corp.
When natural gas is in the early stages of a rally, EQT Corp. (EQT) is my “go to” stock. The company boasts nearly 4,000 drilling locations—and the lowest breakeven costs in the industry. (Names hidden in the chart below to protect the less profitable!)
The prices above indicate at what level the company’s gas is profitable to drill. Notice that EQT leads the pack overall.
What’s more, the company is tightening its grip on the prolific Appalachian Basin through its recently completed $14-billion acquisition of Equitrans Midstream, its former midstream business, which adds 3,700 miles of pipeline, plus storage assets.
EQT sees the move resulting in $425 million in cost savings (The firm also recently cut its workforce by 15%). It also nicely positions EQT as it moves to boost production after last winter no-showed in large parts of the country, hitting gas prices.
Remember, too, that natural gas is the least offensive of the fossil fuels, which gives it long-term upside as a “transition” fuel as the world shifts toward renewables.
Which brings us back to the Dividend Magnet.
For months and even a few years, tickers can meander independently of their dividends. But eventually, they do follow their payouts higher like a puppy dog. EQT’s dividend has leaped above its stock, putting a strong pull on its price:
Even if I’m wrong with my “no-landing” call, all signs point to this one winning anyway.
The stock is still well off its 2022 peak, its dividend is on a tear, and natgas production is about to ramp up, thanks in part to surging power demand from energy transition. That makes now a great time to buy EQT—and its charged-up Dividend Magnet.
Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.
Disclosure: none